EUROPE: EU shaken by African refugee influx, financial crises

by Peter Westmore

News Weekly, April 30, 2011

Despite the continued desire of countries in central Europe such as Croatia, Macedonia and Turkey to join the European Union (EU), the future of the bloc has been put into question by the continued financial crises of several member states, the influx of north African refugees over recent months, and the election of anti-EU MPs in some countries.

The latest problem arises over the influx of tens of thousands of refugees who have fled from Libya and
Tunisia to escape the political turmoil of recent months.

These people have fled to Italy, entering the country through the island of Lampedusa and Sicily. Lampedusa, a small holiday island just 100 km off the coast of Tunisia, has a normal population of about 5,000, and hosts a NATO base.

But about 20,000 Tunisians have arrived in boats in recent months, and have been taken to the Italian mainland for resettlement, where they have been given six-month temporary residence permits.

The influx of African immigrants into Italy is unpopular, because Italy has long been the first port of call in Europe for people leaving trouble spots in north, east and west Africa. The existence of African ghettos in Italy has been a constant source of unrest in the country, exploited by anti-immigration parties and exacerbated by the involvement of some refugees in crime and drug-smuggling.

However, the Tunisians speak French — a legacy of French colonisation — and have tried to move to France, prompting the French Government to seal the rail border with Italy, refusing entry to anyone unable to support themselves, effectively leaving the Tunisians in Italy.

The French Government action is a violation of EU rules which give people living in the EU zone the right to move from one country to another.

The Italian Government, which faces acute financial problems of its own, is fed up with having to deal with the problem alone. Its Foreign Minister, Roberto Maroni, said recently, “I wonder whether in this situation it makes sense to remain within the European Union.”

Quite separately from the problem of refugees and illegal immigration, the EU is grappling with deep divisions over its response to the north African political crisis, and the deepening financial crisis of the EU zone, which has already led to the bail-out of Greece, Ireland and Portugal. (Iceland, another country whose economy collapsed during the global financial crisis, is not yet a member of the EU.)

The continued crisis in Libya has sharpened the divisions. In response to the democratic uprising in Libya, Britain and France have spearheaded efforts to support the opposition to Colonel Gaddafi, by bombing Gaddafi’s military infrastructure. However, both Germany and Italy (which once colonised Libya and has continued ties with the Gaddafi regime) are opposed.

In response to the popular uprising, the Arab bloc and the United Nations Security Council have explicitly endorsed only limited action against Gaddafi, restricting military efforts to protection of Libyan civilians, and explicitly opposing any use of Western ground forces, such as those which broke the political stalemate recently in the Ivory Coast.

It is clear that these restrictions protect Gaddafi from being overthrown, as the untrained Libyan opposition has proved no match for Gaddafi’s 100,000-strong army, which includes several brigades controlled by members of his immediate family and tribe, and an unknown number of African mercenaries.

The war in Libya has become a stalemate, with Gaddafi in control of most of the populous western parts of the country, including the capital, Tripoli, while the opposition controls the arid western end, around the city of Benghazi.

The Western military intervention has been futile, and Gaddafi remains in control.

Behind these issues lies the deep financial crisis which has afflicted the Mediterranean countries of the European Union since the global financial crisis in 2007/08.

While the European financial crisis was separate from the Wall Street collapse in 2007, it had some similar causes, including massive financial speculation using the new financial instruments of collateralised debt obligations, stock exchange speculation and a speculative real estate boom.

Additionally, however, there were local causes, including the integrated financial system in Europe, which made it possible for countries such as Greece to bankroll their deficits through European banks, excessively generous pensions schemes and large public sectors.

In 2009, Greece’s budget deficit was estimated to have been 13.6 per cent of GDP. However, a re-evaluation of Greece’s balance sheets in the latter part of 2009 revealed Greece’s budget deficit was in reality closer to 15.4 per cent of GDP.

A collapse in the Greek economy was averted last year when the country accepted a €110 billion ($150 billion) rescue package from the EU and the International Monetary Fund, in exchange for an economic austerity package which provoked widespread opposition in Greece.

The Greek collapse was followed by similar bailouts of Ireland and Portugal, putting at risk the entire EU zone economy.

Spain, whose economy was severely damaged by the global financial crisis, is the next country at risk. Unlike the other countries, however, Spain is one of the large nations of Europe with a population near 50 million, and its troubles have deeper implications for the rest of the EU.

Spain’s unemployment rate has soared, reaching 20 per cent. The budget declined from a surplus of 2 per cent of GDP in 2007 to a deficit of 11.2 per cent of GDP in 2009, due to the large stimulus package and declining revenues.

Spain shares several of the weaknesses of the three fallen economies. The country has lost its competitiveness, and has a large current account deficit similar to Greece and Portugal. Prime Minister Zapatero’s recent decision not to seek re-election will likely add greater uncertainty to Spain’s already dubious fiscal future.

Italy is also considered vulnerable. Its financial situation is now as bleak as the countries already discussed, because its government debt is now 120 per cent of GDP.

Several possible solutions have been put forward for the still-widening financial crisis.

If the present bailouts are insufficient to rescue the Greek, Irish and Portuguese economies, their governments could become insolvent, and would have to enter a form of debt restructuring.

The problem with this is that it could effectively bankrupt many of the largest banks of Europe, which have been lenders to these governments through purchases of government bonds.

In any case, all these countries will have to impose large cuts in public expenditure and increase taxes and charges. Britain, for example, has imposed extensive spending cuts, including cuts to welfare benefits, increase of the retirement age, a rise in university tuition fees and public transport, and reduction in the number of government employees.

China, one of the world’s largest creditor nations, has promised support for the Eurozone economies, but linked it with increased access to Europe’s high-technology exports.

A final option, not publicly discussed at the moment, is exclusion from the Eurozone itself.

Germany at one point threatened to exclude fiscally irresponsible countries that were failing to follow European Monetary Union guidelines.

Although the forced or voluntary exit of a nation within the EMU is currently illegal, such exit has been touted by some politicians and economists as a better alternative to the prevalent austerity strategy.

Because insolvent nations could potentially drag down the entire Eurozone, exit may be welcomed by other states as a means to halt further damage to the union.

Inevitably, individual European nations lack control over the Euro currency, a vital tool necessary for economic recovery after a financial crisis.

Exit from the EMU would require departing nations to issue their own national currency, as Britain has continued to do since joining the European Union.

Exit from the Eurozone would allow highly indebted nations to exercise their own monetary policy. Through currency devaluation, these nations could soften fiscal austerity measures and stimulate the economy through more price-competitive exports.

While financial integration of Europe prompted rapid economic growth from the 1980s until the global financial crisis struck, the crisis has revealed deep structural weaknesses in several European economies which have dragged down the whole of Western Europe over the past four years, and made the European banks risk-averse.

The integration of Europe’s economy, while individual nations have been free to pursue their own domestic economic policies, has meant that the structure of the European Union and the European Central Bank is flawed. Yet attempts to impose a more centralised financial structure have been fiercely resisted, not only by politicians, but also by ordinary people.

Yet these structures are now embedded in legislation, endorsed by each of the member countries, so they are very difficult to reform. One consequence of the continuing financial crisis in the
Eurozone is that the value of the Euro has continued to languish, particularly in relation to the weak United States dollar.

One result of this is that EU trade exports continue to be high, while plans by the Obama Administration to rescue the US economy through exports, based on the low US dollar, have largely failed because of fierce competition from other nations, including China and the European Union.

The continued economic crisis, the stalemate in Libya and the refugee crisis have prompted new questions over the framework of the EU, its durability and the willingness of European citizens to accept its rules. These questions remain unresolved.